Global Economics and Management

Fareed Zakaria on Ezra Klein's Podcast

Last week Ezra Kein of the New York Times welcomed the great Fareed Zakaria on his podcast. The conversation was wide-ranging, and included virtually all of the major global issues of the day, with a particular emphasis on China and India. In sum, the podcast was a perfect introduction to Global Trends, which I am now gearing up to teach one more time this Summer. I recommend this podcast heartily!

Weekend Readings / Listenings

1) In Foreign Affairs, we are given a review of Ashoka Mody's recent book, "India is Broken". Many commentators often profess strong enthusiasm for India's prospects in terms of economic development, geostrategic clout, and political liberalism. Mody's book brings us back down to earth and provides a sobering look at some aspects of India's development - such as growing illiberal tendencies in the political realm, the trouble India has had in creating jobs for its enormous and fast growing population, and the permanence of many aspects of underdevelopment, including environmental degradation. But in the end, a glass that is half empty is also half full, and this is a somewhat futile debate. There is no doubt that in recent decades India has modernized in unprecedented ways. With modernity come good things, even if they don't come immediately. An India with a per capita income of $15,000 (which it should reach in about 15 years on current trends) will look nothing like the India of the early 1990s, with a per capita of around $2,000 (in constant 2017 PPP dollars). Sure, there are challenges, but the future is bright for India.

2) Over at The Good Fight, Yascha Mounk's excellent podcast on political economy, Timothy Garton Ash of Oxford offers penetrating observations on the past, present and future of Europe. Recommended.

3) At Bloomberg, Niall Ferguson discusses the often-predicted demise of the US Dollar as the world's reserve and transactional currency. Bottom line: the USD may be fading a bit, but it will take a very long time for its main competitors (the Euro, the renminbi) to lay claim to its dominance.

Three Items of Note

1) Bloomberg has a comprehensive assessment of where India stands in its development process, with an explicit comparison to China. This article could have been a session of Global Trends!

2) The Economist gushes on the performance of the US economy. It is true that the US economy is a thing of wonder: still the dominant engine of knowledge and therefore wealth creation in the world, still one of the fastest growing countries, especially among industrialized ones - leaving Europe in the dust in terms of per capita income. It is all too easy to focus on the negatives (political polarization and gridlock, deaths of despair, income and wealth inequality, environmental challenges) - but there will come a point when international differences in these respects will be dwarfed by differences in per capita income - and these are likely to increasingly favor the US.

3) Over at Calmatters, a sober look at California's energy transition. Stated goals of decarbonization will much harder to achieve than is generally acknowledged. Just transitioning fully to electric cars will involve unrealistically large increases in electric generation capacity. One thing that stands in the way is regulation - including, ironically, environmental regulation - which hinders California's ability to quickly bring new power generation capacity online. The article extensively cites my friend David Victor, a professor at UCSD.

The Guardian on Global Poverty

The Guardian recently ran a nice article summarizing a new report from the Center for Global Development, one of my favorite Washington DC think tanks. The report, authored by Charles Kenny, points out the enormous progress that has been made, in recent decades, in the fight against extreme world poverty. It also forecasts that poverty would further come down in the coming decades, with the share of the world population living with less than $2.15 a day falling from 8% currently to about 2% in 2050 (the fall in extreme poverty should not obscure the tremendous growth that has occurred above this very low threshold, in particular with a dramatic increase in the size of the global middle class). The near eradication of extreme poverty in recent decades and its likely continued decline in the years ahead surely must count as one of mankind’s greatest ever achievements, bar none.

This decline is attributable to one and only one cause: growth. The countries that have experienced the greatest decline in poverty in terms of raw numbers are China and India. As we discuss repeatedly in Global Trends, these countries have experienced a surge in aggregate GDP growth since they started their reform process in the late 1970s (China) and early 1990s (India). No other cause comes close to growth as a quantitative explanation for the fall in poverty. Not aid, not micro-interventions, not pure redistribution. Growth - and in particular growth due to better economic management of complex societies, based on a degree of openness (globalization) and the injection of market mechanisms - is the root cause. When growth slows, the fall in poverty stalls. When growth picks up, the decline in poverty accelerates. This is a somewhat inconvenient fact for those, among the bien-pensant class, that believe that aid and redistribution can cure all ills. Aid and redistribution vastly predate the massive fall in poverty experienced in recent decades, and yet this fall only occurred when poor countries started to catch up with rich ones in terms of per capita income. That is, when they started on paths of sustained growth.

The unfortunate reality is that many are blind to this fact. On the contrary, a dangerous school of thought is becoming prevalent among development elites. I would call it the «zero growth» school. These individuals argue that growth is associated with environmental degradation and not necessarily with a fall in inequality. They advocate policies that would stop aggregate GDP growth and instead focus on redistributing existing resources. But the needed transition from carbon and the generalization of transfer schemes is only possible if more resources can be mobilized to achieve these goals. These resources can only come from continued growth. It is both a fallacy and wishful thinking to think that redistribution and de-carbonization can happen without growth. In fact, The Guardian also recently featured the «thinking» of one of the leading proponents of this school of thought: Olivier De Schutter, the UN special rapporteur on extreme poverty and human rights. Yes, you read that right, the UN’s special rapporteur on extreme poverty wants to end growth!

To me, zero-growthers are akin to arsonists. If their policy prescriptions to end growth were to come to fruition, untold misery would result. The slowdown in growth, and concurrent reversal in the downward poverty trend that we experienced during the COVID years, would pale in comparison to the hundred of millions who would fall back into utter misery if growth stopped in countries like India, Bangladesh or Indonesia. In my view, advocates of zero growth policies are grossly irresponsible to the point of criminality.

Thankfully, most elected leaders and enlightened policymakers show no intention of pursuing a zero growth objective. If they did, they would be thrown out of office in a hurry. And if you think that the surge in populism was a concern in the wake of the global financial crisis, wait until we have zero global growth.

Pharmaceutical Safety in India

Over at Bloomberg's opinion page, Ruth Pollard opines on recent incidents of contaminated pharmaceutical drugs produced in India. These incidents are disturbing and call for tighter oversight and regulation. But one has to remember that India is the world's largest producer of generic drugs and vaccines. In this context it is not surprising that some incidents would happen. The real question with issues like this one is: how abnormally frequent are these incidents? It is otherwise all to easy to place a cloud of doubt on an entire industry simply because of a few tragic events.

My Weekend Readings

This weekend I have been catching up on some salient news articles that I did not have the time to digest last week.

1) As we approach the part of Global Trends where we will discuss environmental challenges, a recent Wall Street Journal article reports on the progress made in Indonesia in the fight against deforestation. This could serve as a blueprint for other countries, like Brazil, that face this major challenge. Deforestation is one example where modernization theory (and the Environmental Kuznets Curve) really works: richer countries are better at protecting their forests, and in many of them, forested areas are actually rising. Indeed, we are at a point where many countries, including China and India, are actually seeing gains in forested area. (03-06-2023 Update: Here is the Nature paper using satellite data to measure forest cover, which I mentioned in class today.

2) Also at the WSJ, Henry Kissinger, Eric Schmidt and Daniel Huttenlocher wrote a lengthy essay on the challenges and opportunities offered by AI. The article makes a very important point on the nature of AI, which is the lack of understanding of why an AI engine produces the results that it does. The crucial paragraph is the following:

"Enlightenment science accumulated certainties; the new AI generates cumulative ambiguities. Enlightenment science evolved by making mysteries explicable, delineating the boundaries of human knowledge and understanding as they moved. The two faculties moved in tandem: Hypothesis was understanding ready to become knowledge; induction was knowledge turning into understanding. In the Age of AI, riddles are solved by processes that remain unknown. This disorienting paradox makes mysteries unmysterious but also unexplainable. Inherently, highly complex AI furthers human knowledge but not human understanding—a phenomenon contrary to almost all of post-Enlightenment modernity. Yet at the same time AI, when coupled with human reason, stands to be a more powerful means of discovery than human reason alone."

3) In the last class, I mentioned that the "woke" movement may have reached its peak. Indeed it is quite apparent that it is provoking a pretty broad backlash. Three recent resources document this process. The first is a recent article in the Financial Times. The second is a blog post at Marginal Revolution analyzing data on the use of certain words in the New York Times. The third is a recent WSJ podcast on the backlash against ESG investing. My view is that social and cultural innovations often overshoot, and that it takes time for society to find a new cultural equilibrium in the wake of a cultural innovation. In my view, the woke movement will not disappear, nor will it take over the world. It is a movement that makes good points, but did not always make them in a way that truly served its goals (in other words, it is frequently self-defeating). It is now in a maturation phase, and this is exactly how the social dialectic of a pluralistic society should play out. 

4) The US is trying to reshore microchip production. Last year's bipartisan CHIPS Act provides subsidies for the production of chips in the US. But these subsidies, like the electric vehicle subsidies that we discussed in class last time, come with many strings attached. Therefore, it is not clear that the CHIPS act will work to raise chips production in the US. The Wall Street Journal's excellent Greg Ip provides more details. In my view, it would be better to diversify the global supply chain of chips than to use industrial policy to reshore the production of these crucial components, because industrial policy rarely achieves its goals. The example of iPhone production is telling. It would be costly and futile to produce and assemble iPhones in the US. If industrialized democracies want to insure against geopolitical risk involving China, it would be better to have multiple sources of production around the world. This is what Foxconn seems to have understood, as it gradually raises its footprint in India.

The Emergence of India

In class today, I mentioned a recent article by Greg Ip in the Wall Street Journal about India's emergence as an economic heavyweight. Money quote:

"2023 could be the year India finally emerges as a global economic heavyweight. For that, thank the cumulative effect of solid economic growth, microeconomic reform and a changed geopolitical environment that has the West more eager than ever to draw India into its orbit."

I expect a lot more stories like this one in the months to come, as India's growth continues to outstrip that of the rest of the world.

If you want to read the numerous posts, on this blog, about the Indian economy, go here. The "Indian Economy" category on the GEM blog started in January of 2013, and features 99 posts.

Items of Note from this Past Weekend

A few things caught my attention this weekend:

1) Adani and ESG: The Adani Group kerfuffle, which I wrote about recently, is bringing added scrutiny to the ESG movement, as Adani Group companies were often included in ESG indices. This is ironic since the conglomerate's activities included coal, energy, heavy infrastructure, and other activities not generally associated with a light environmental footprint (the E in ESG). And the allegations levied at the Adani Group do not seem to point to very good governance either (the G in ESG). Bloomberg recently featured a good article on the subject, which really compounds many of the questions that people have levied at ESG investing lately - from all sides of the spectrum.

2) On US war preparedness. Niall Ferguson, also at Bloomberg, questions whether the US would be prepared for a large scale conflict, given the rapid depletion of many of its weapons stockpiles in the context of the Russia-Ukraine war, and its failure to detect various intruding flying objects into its airspace in recent days. As always with Professor Ferguson, the article highlights these developments in a historical context, suggesting that the type of production structure that the US now has, based on services and on sliced-up value-chains, would put it at a disadvantage compared to China in the eventuality of an armed conflict. The situation is very different than it was prior to the Second World War, when the US was a manufacturing powerhouse and was able to rapidly ramp up the production of armaments in war time.

3) Is the US undergoing a growth upturn? Over at the WSJ, Nick Timiraos, one of their very best economics reporters, reports that many economists think the economy is overheating. This would bring the possibility of continued - even accelerating - inflation, and require the FED to further raise rates - in line with one of my recent posts here. 

The Shorting of Adani

This post owes a debt of gratitude to your classmate Dheeraj Jalluri who prompted me to dig deeper into the recent controversies about the stock valuation of the Adani Group, India's newest and up-and-coming large business conglomerate. The background story is that on January 24, Hindenburg Research, a research and investment organization famous for having shorted electric truck maker Nikola, issued a report alleging that the Adani Group's accounting practices were fraudulent and that the market values of the group's constituent companies were inflated. This was accompanied by an effort to short these stocks - an effort that remains successful as of today - the value of the Adani Group having fallen by $64 billion as of today.  

Both Bloomberg and the WSJ have excellent coverage of the issue. To me the recent events suggest a couple of comments and interrogations:

1) I’m not terribly surprised that short sellers would target the Adani Group. It was a very fast rise with some political connections playing a substantial role, and a huge run-up in valuation that may or may not be supported by underlying fundamentals. This is now being put to the market test.

2) A question arises as to whether this could have systemic consequences on the Indian stock market and beyond. So far, the main index on the Bombay Stock Exchange is down about 2.5% since January 24, hardly the stuff of meltdowns. So when Dheeraj asked about such systemic effects, my initial reaction was to answer no. After all, the Indian economy is huge and diversified, with strong growth fundamentals. However, as the days went by, I started wondering. If the allegations uncovered by Hindenburg turn out to be true, they could lead to questions about the accounting practices of other Indian business groups. And from what I know of bookkeeping and accounting practices in India, it would not surprise me if such audits founds pretty generalized dubious practices. 

3) A small New York-based research and investment outfit can cause a huge wipe-out in a company's stock value. They don't even do it by shorting the Adani stock directly, but can do it through ETFs, etc. Is this good or bad? Good. This is the disciplining effect of globalization that we discussed in class. Either Hindenburg it right, and Adani will have to right their wrongs, or Hindenburg is wrong, and Gautam Adani will come out stronger for having withstood the test of the market. Accounting practices in India - where it is too often the case that auditors are connected to business owners and where transparency on underlying businesses, even in publicly traded companies, can leave much to be desired - will also come out stronger from such a controversy. This is the process of modernization at work!

Definitely a dossier I will keep tracking.

Recent India News

Bloomberg continues to be one of the very best sources of information on India and the Indian economy - at least when it comes to the a Western press. Three items there caught my eye in the last few days:

1) India is slated to slow down next year, and while the decoupling with China offers an opportunity to India, it won’t happen soon enough to matter in the short run. 

2) While the Modi government has overtly nationalistic overtones, it is also coming to the realization that the growing trade protectionism it has championed in recent years is unsustainable. There is now talk of cutting tariffs. This is a very welcome policy change.

3) India is emerging as a prime alternative to China for iPhone manufacturing. It will take some time, but this article strikes an optimistic note for India.